Greece Announces Terms Of Bond Buyback, Repuchase Prices Higher Than Government Indicated PreviouslySubmitted by Tyler Durden on 12/03/2012 07:54 -0400
It may still be unclear just where Greece will get the ~€10 billion in cash needed to buyback up to 20 various tranches of the post-restructuring GGB2 bonds (full CUSIP list below), but what the Greek Public Debt Management Agency announced today was the sound of money in the ears of the hedge funds that had bought up Greek bonds in the low teens several months ago, if not so much Greek banks many of whom may still have this debt market at up to par, as no matter which particular group of taxpayers ends up funding this "buyback" - a process that will have zero benefit to the Greek population who will see not one penny of the buyback proceeds (as described before) - it is the hedgies that benefit, who also have clearly controlled the process from the beginning as the announced tender prices were well above the levels Greek bonds eligible under the buyback closed at on Nov. 23, even though Greece's lenders last week said they did not expect the bonds to be purchased for more than the closing price on that date. In other words, the Greek government lied to its people again for the benefit of wealthy financial interests yet again.
What changed in the last 30 days? Did the world just wake up to the idea that the only way out of this quagmire is a twisted currency war that appears to have re-ignited thanks to Abe's efforts? Something appears to have snapped in the American psyche as the last 30 days have seen the largest physical gold sales on record. Between the search volume for 'bulk ammo' and this, we fear something is afoot and while Congress fiddles as our economy burns, Bernanke going 'back to work' is perhaps what the physical 'horders' are thinking... or maybe they understand, as we noted here, that just as Kyle Bass has confirmed previously, Paper Gold is just like allocated, unambiguously owned physical bullion... until it’s not.
Europe is supposedly fixed and/or well on the path to being competitive and "rebalanced." Or so they say every day. What they don't say, is that to complete the process of rebalancing, in the absence of external devaluation mechanisms under a currency union, is that wages in countries such as Spain, Italy and even France, will have to drop by another 30%-50% for internal imbalances between the Eurozone's nation states to be evened out. What they certainly don't say is how this could ever possible be achieved...
China's Manufacturing PMI missed expectations, coming in at 50.6 relative to a slightly expansionary 50.8 expectation, and up down from the 50.2 prior. This is the fifth month in a row of missed expectations but it has now risen for three months in a row, to the highest level in 8 months; but has now hovered within 0.6pts of the expansion/contraction knife-edge for six months. The PBOC's index remains above (more positive) than the HSBC version for the 20th month in the last 21 (which remains in the contractionary sub-50 range it has been in for 16 months). With the Shanghai Composite testing Jan 09 lows and the ongoing Reverse Repo delicate bank pumpathon, the relative stabilization in Services and Manufacturing PMIs is confirmed by this evening's data and provides hope for those bidding H-Shares to 16-month highs. Interestingly for all those who remain shocked at the divergence between the Hang-Seng and the Shanghai Composite, it seems clear that A-Shares investors remain skeptical of the PMI-based stabilization of macro and prefer to trust the weaker (and harder to tweak) Industrial Output data.
The natural reaction from policy makers, so far, has not surprised us. Rather than addressing the source of the problem, they have and continue to attack the symptoms. The problem, simply, is that governments have coerced financial institutions and pension plans to hold sovereign debt at a zero risk-weight, assuming it is risk-free... and just like since the beginning of the 17th century almost every serious intellectual advance had to begin with an attack on some Aristotelian doctrine, I fear that in the 21st century, we too will have to begin attacking anything supporting the belief that the issuer of the world’s reserve currency cannot default, if we are ever to free ourselves from this sad state of affairs. This problem truly brings western civilization back to the time of Plato, when there was nothing “…worthy to be called knowledge that could be derived from the senses…” and when “…the only real knowledge had to do with concepts…”. Policy makers then believe in recapitalization and coercive smooth unwinds. With regards to recapitalization, I will just say that we are not facing a “stock”, but a “flow” problem. With regards to smooth unwinds, I think it is obvious by now that the unwind of a levered position cannot be anything but violent, like any other lie that is exposed by truth. Establishing restrictions to delay the unmasking would only make the unwinds even more violent and self-fulfilling. But these considerations, again, are foreign the metaphysics of policy making in the 21st century.
Whether you trust the squid and their thought process or believe in 'better the devil you know', Goldman's top thinkers - from Garzarelli to Himmelberg and from Stolper to Hatzius and Wilson - lay out the top ten global macro themes from their economic outlook that will dominate markets in 2013. Agree or disagree, one thing is for sure - these ten 'themes' will impact us all one way or another and for each theme, Goldman discusses the wider implications for markets, and the potential issues and options for investing around them. Aside from the ten key themes, they provide succinct macro outlooks for rates (steeper curves and seniorty shifts), FX (moderate USD weakness amid broad stability), equities (accelerating growth and risk reduction underpin a solid 2013), and credit ('search for yield' has less to find).
Remember when after the Fukushima explosion, in order to avoid panic Japan doubled the maximum dose of "safe" daily radiation allowed, and then raised it some more? This is kinda like that, but instead of Gamma rays you have Twinkies.
The world no longer makes sense to most people over forty years of age. Much of what we thought was true is now denied. What to us is obviously false (or at least always was) is now accepted as being true. Truth cannot be changed by repeating falsehoods. Nor can it be altered by more people believing untruths. But, when these fantasizers overwhelm society with their false beliefs, society will no longer function. As Ayn Rand stated:
You can avoid reality, but you cannot avoid the consequences of avoiding reality.
The avoidance of reality has overtaken our society. The consequences of doing so have been building for decades and will soon overwhelm us. On our current path, much of what we knew and cared about will be destroyed.
Thus far, the US has been the mainstay of Western recovery - the basis upon which investors' cautious optimism is espoused. As Diapason Commodities Sean Corrigan notes, a large slug of non-recourse debt default in the residential mortgage area has helped people escape the yoke while not serving to imperil the state-supported banks. A drastic, 20%-plus fall in house prices has seen the market clear, forming a base from which many feel a new advance in construction activity is slowly being built. The shale energy bonanza – if not yet filtering through to the price of the consumer’s routine fill-up – has begun to alter the landscape as far as producer competitiveness is concerned. And yet a host of interrelated indicators are flashing red; especially when one notes that these are closely correlated with either non?financial corporate profits and/or the stock market level itself - and form the basis of an informed realist's skeptical pessimism at equity market exuberance (or blind enthusiasm) - none more so than the two-sigma plunge in Durable Goods Shipments and its implications for a greater-than-15% crash in stocks.
On November 27th, 2012, the Eurogroup (comprising the Eurozone’s finance ministers) reached a decision on Greece. Its essence is a guarantee that Greece will remain in the Eurozone (and therefore off the Northern European agenda) for another ten to twelve months; at the very least until the German federal political cycle has seen through the election of a new Bundestag. The repercussions of this short-sighted agreement are grave not only for Greece but for the Eurozone, and indeed the European Union, more broadly. The fact that the markets’ expectation of some OMT assistance for Italy and Spain are keeping their bonds’ yields low, for the time being, does not alter the fact that the vicious contagion dynamic is gathering strength. Beyond this ‘small’ matter, Rome, Madrid and, indeed, Paris must now reckon with a Eurogroup decision that demonstrates how bogus all talk of a Growth Pact really has been. The fact that the Eurozone’s finance ministers declared, without the slightest hesitation, that substantial growth will come to depression-hit Greece without an iota of a smidgeon of a hint of fresh public investment reveals that Europe is truly blind to what it will take to deal with the recession it faces in aggregate and with the various depressions in its Periphery. So, what will come of Greece, given the latest Eurogroup ‘decision’? It is my fear, and belief, that the country is becoming a version of Kosovo – a protectorate in which the euro remains the currency, sovereignty is minimal, the population is ruled over by a glorified kleptocracy with strong links with Berlin and, last but not least, a permanent migratory flow is established that sees the young and the skilled move to northern Europe and beyond.
The personal income and spending report Friday morning left a lot to be desired for those expecting a stronger economic environment soon. However, the report fell well in line with what we have been expecting over the past several months as the drag on real wages and incomes have weighed on the consumer; and with personal consumption making up more the 70% of the economy, changes to employment, incomes or credit has an immediate and significant impact to growth. When it comes to the economy, and particularly the ongoing recession watch that has nearly become a sporting event, it is real (inflation adjusted) incomes that matter. In the most recent report we see that real personal incomes declined for the month from $11,546 to $11,532 billion for the month reflecting a -.12 change. Economic expansion since the last recession has been hovering around a flat line for the past seven months. The next couple of months will be very telling about the strength of the underlying economy. The manufacturing data continues to point to further economic weakness, hiring plans have deteriorated and the main drivers of economic growth have all stagnated. While we can hope to get lucky that things will work out for the best - "hope" rarely works out as an investment strategy.
After this year's presidential campaign, private equity and certainly Bain Capital, will likely be the last entity that those pandering to populist agendas will go to advice over the future of the business cycle in broad terms, and the future of US labor, most certainly including outsourcing, in narrow terms. And Goldman - that staunch defender of the superiority of capital over labor - will hardly be confused as ever taking the role of workers in any discussion. Which is why we read the following interview by Goldman's Hugo Scott-Gall with Bain Capital partners Michael Garstka and Alan Bird on such topics as corporate restructurings and the future of outsourcing with great interest, as it is very much unlikely that any of the conventional media sources would carry it. And while one may have ideological biases in whatever direction, the truth as presented previously, is that US private equity is a massive "behind the scenes" juggernaut, whose portfolio holding companies account for a whopping 8% of US GDP, and is directly and indirectly responsible for tens of millions of currently employed US workers! At the end of the day, it may well be that what private equity firms such as Bain think about the future of US labor prospects is the most important thing that matters for the future of the so very critical US unemployment rate. Which is why we present, for your reading pleasure, the somewhat unorthodox interview below...
In the recent past we noted the somewhat startling reality that "the single mom is better off earning gross income of $29,000 with $57,327 in net income & benefits than to earn gross income of $69,000 with net income and benefits of $57,045." While mathematics is our tool - as opposed to the mathemagics of some of the more politically biased media who did not like our message - the painful reality in America is that: for increasingly more Americans it is now more lucrative - in the form of actual disposable income - to sit, do nothing, and collect various welfare entitlements, than to work. This is such an important topic that we felt it necessary to warrant a second look. The graphic below quite clearly, and very painfully, confirms that there is an earnings vacuum of around $40k in which US workers are perfectly ambivalent toward inputting more effort since it does not result in any additional incremental disposable income. With the ongoing 'fiscal cliff' battles over taxes and entitlements, this is a problematic finding, since - as a result - it is the US government that will have to keep funding indirectly this lost productivity and worker output (via wealth redistribution).
One of the best bond traders on Wall Street said this recently: “Get ready for The Great Bond Shortage in North America. If it has a cusip and it is rated, it is going higher/tighter.” The compression in bond spreads since the Fed started all of their “made-up/newly printed money for free” antics is the root of all of this and we do not expect a change anytime soon. There are various estimations for the 2013 net new issue supply in all sectors of Fixed Income but I peg it around $400 billion. Around $800 billion will be paid to bond holders during the year in coupon payments and, if reinvested, will cause a supply deficit of about $400 billion for the year. Exacerbating all of this is the Fed, who will buy around $500 billion in MBS this year and perhaps the same amount in Treasuries which could take $1 trillion out of the market all by itself. Consequently we face a lack of bonds denominated somewhere between $900 billion and $1.4 trillion, depending upon the Fed, which will increase the rolling train of compression, lower interest rates further in all likelihood and cause great angst for investors who will find very little of value left in the Fixed Income markets. Safety; yes but yield; no. Inflation and Deflation, it should be noted, only work in operative systems; but it is not Inflation or Deflation that are going to matter in the short run, though it will later; it will be the lack of bonds of any sort to purchase and a stock market that may be dangerously out of sync with the fundamentals opening the possibility of a crash. If so much money is printed and so little regard is placed upon fundamental economic principles then the Real Estate crash of several years ago will look like child’s play by comparison. “Systemic Breakdown” would be the functioning words.
There was a time when flings (insert personal contextual experience) used to be simple, impromptu, largely trivial things seeking instant gratification. That was until Shell's Floating Liquid Natural Gas facility, or FLiNG, came along: currently being built in the South Korean shipyards (largely unoccupied in the past several years after a surge in dry bulk container ship construction left the industry with a massive inventory glut and little demand for its precision engineering), this behemoth of a ship, measuring nearly half a kilometer in length, and displacing 600,000 tonnes of water, will be the world's largest offshore floating facility when deployed 200 km off the north-west coast of Australia in 2017 to process the recently discovered Prelude and Concerto gas fields. It will also likely revolutionize the field of Liquified Natural Gas extraction.